Brevan Howard: The Risky Gets Riskier

Brevan Howard Mater Fund, incorporated in “CaymanIsland”, has become more risky as it hires aggressive traders and analysts in their team. During 2011, the company has appointed more than 30 traders and analysts from the market and gave them full authority to trade and float aggressive investment ideas.

The investment mangers:The group has recruited smart, talented and experienced traders from the market. The introduction of Volker rules gave Brevan Howard the chance, which it availed, to hunt risk taking traders from banks.

As per the Brevan’s policy, the investment manager has the complete authority to take trading and investment decisions. The manager decides over the issues related to funds under his management. Funds diversification is at the discretion of the fund manager as there are no set rules and criteria by the company. The managers’ base their sole decision based on their understanding and expertise.

Brevan’s investment managers are popular because of their quick entry and exit in the financial markets. This high level of flexibility and aggressive new fund entrants expose investors’ funds to high level of risk. Moreover, some of the new managers have less or no direct experience of the funds, increasing the probability that they may engage themselves in erroneous trading practices.

2011 returns by freshly employed traders:

In 2011, Brevan Howard generated significant returns by its newly hired traders. This reflects that the fund managers are playing rough in the market, taking advantage of market volatility and inefficiencies. The recruited traders have strong previous reputation in the market and most have been picked after looking at their past performances.

The outgoing year was a successful or let say a lucky year for Brevan, but this attitude does not look sustainable as this can cause serious injuries.

“Returning Capital” a typical trader’s psyche:

The Management itself is not confident on its performance and knows that the current level of investment return is not sustainable. This is evident from the management’s decision to reduce their funds under management by making capital distribution to the investors. This is a typical trader’s psyche, when the trader has doubts about the future performance and knows that the current performance may not sustain and the rough trading may cause losses. Then usually a trader decides to realize some gains or withdraw some capital.

Following the same psyche, in 2011 the management decided to take “unusual step” and return capital to its investors to bring down funds under management to $25 billion levels. This clearly indicates that the management was not comfortable with the amount of investment return they have made.

Will Alan Howard will able to cope up with the new number of traders?

Alan Howard is the essential resource of the group investments. He is well known for his risk taking ability and expertise in taking advantage of inefficient markets. He has been able to manage the trader working under the same umbrella and give them luxury to take aggressive trading decisions, keeping a vigilant eye on their investment decisions.

Brevan’s key is that if any fund manager looses certain money, assets under his management will be reduced and he will be requested to follow different strategies to make sure no losses occurs. Up till now the group was able to handle the aggressive attitude and build its reputation as a strong risk taker and profit generator. Now the scenario is little different, the company is hiring aggressively and allowing the traders to take undue risk.

The question arise will Alan Howard be able to look into the increased number of traders and will he be able to mitigate the risk at the right time? With the current strategy the group follows, it has become highly risky and speculative with increased probability to investment losses.

One bad fish can spoil the whole pond:

Brevan Howard is known to be one of the most speculative and risky fund managers.

The company has been able to post tremendous returns in the past. It was able to come out of big crisis like 2008 financial melt down. But its current strategy does not look sustainable because the group is doing too much hiring and taking too much unnecessary risk. One fund manager’s bad decision can dent the reputation of the group.

Funds Strategy:

The funds are invested primarily in interest rates, equity and foreign exchange followed by investments in commodity and credit.

The fund managers are quite efficient to take quick entry and exit in the market and take the advantage of the volatility. Interest rates are traded heavily and the group was able to make some handsome profits from its interest rate trading in 2011. Moreover, the group has huge exposure in foreign exchange but we haven’t heard the group making any gains out of it last year.

Brevan’s managers have strong command over variance swaps. They were successfully engaged in the trading of these swaps taking advantage of price volatility and inefficiencies of the stock markets. The group has reasonable exposure in the equities. The group also has some exposure in commodities and credit.

Past performance does not pledge future fruition:

Investors should keep one thing in mind that trading fast is a two way ride. The traders have the strength to take huge risks as they have the mental capacity to realize extra ordinary and unexpected losses. Brevan Howard has been lucky to post excellent past positive performance but this does not rules out chance for big and unexpected losses.

The funds are leveraged:

Just to call attention, Brevan Howard funds use leveraging as a tool to increase their relative returns. This makes the funds more risky as this increase the potential quantum of investment losses.

Test fast, fail fast, adjust fast.

Tom Peters quote “Test fast, fail fast, adjust fast’ fits perfect quote for Brevan Howard with some limitation. The companies strategies, investors’ attitude and economic situation may help the company to test fast and fail fast but adjust fast may gets little difficult.